Risk and preference reversals in intertemporal choice

This paper argues that observations of non-stationary choice behavior need not necessarily imply specific properties of the individual’s discount function. As we show, the observed preference reversals in intertemporal choice are consistent with constant discounting and can alternatively be explained by decreasing absolute risk aversion together with the individual’s risk perception. This risk may concern the size of the actual outcome or the endowment consumption stream to which the outcome is added. Both types of uncertainty naturally appear in the context of intertemporal choice. We show how relative degrees of changes in risk over time can determine choices.

Research highlights▶ Endowment and outcome risk may drive preference reversals in intertemporal choice. ▶ DMs with constant impatience can exhibit behavior suggesting decreasing impatience. ▶ DMs with constant impatience can exhibit behavior suggesting increasing impatience.